Nonprofit 101: Qualifying for 501c3 Tax Status

Podcast

A 501c3 tax status allows qualifying nonprofit organizations to be exempt from paying federal income tax on its profits. Beena Soiefer, nonprofit services and finance manager at Vcorp Services, discusses the basics behind a 501c3 status, including the benefits (in addition to tax exemption), the types of organizations that can qualify, and a few key steps in the application process.

Podcast Transcript

Greg Corombos: Our guest this week on Expert Insights is Beena Soiefer, nonprofit services and finance manager at Vcorp Services. Today we're going to be talking about the importance of nonprofit status and why your business might want to go in that direction. And Beena thanks so much for being with us.

Beena Soiefer: My pleasure.

Greg Corombos: Well let's start with the simple definition What is a 501(c)3 status and who can qualify?

Beena Soiefer: A 501(c)3 status is the IRS tax status that certain nonprofits can qualify for. It allows the qualifying organization to be exempt from paying federal income tax on its profits, if it has any, and allows donors to claim a deduction on their personal taxes for the amount donated to the organization.

Greg Corombos: What else do people need to know?

Beena Soiefer: Well, when it comes to forming the nonprofit, you first need to make sure that the purpose itself is one that qualifies for 501(c)3 status if that's the direction you're going to go. So if you're looking at a purpose that is charitable, educational, religious, scientific, something along those lines, you'll likely qualify for the 501(c)3 status. So that's one point. If you're looking at other types of nonprofit purposes, if you're going to be running a business league, a social club, those can qualify for tax exemption under another section, not the 501(c)3, can be 501(c)4 or 6. Those can be tax exempt but donations to them are typically not deductible to the donors.

Greg Corombos: What can the 501(c)3 status provide to organizations.

Beena Soiefer: Well, it'll also exempt the nonprofit from certain state level taxes. They can then be eligible for grants from other organizations corporate discounts like Amazon has their nonprofit program. Google has their program. There's a nonprofit reduced postage rate, and there's an exemption from federal and employment tax for 501(c)3s.

Greg Corombos: Alright, so once you decide that this might be a good idea for you, what are the steps to actually apply for the 501(c)3 nonprofit status.

Beena Soiefer: The first step is actual entity formation. Nonprofit corporations are generally filed with the Secretary of State of the state where they're located, although in some states certain entity types are filed at the county level. Unincorporated associations, if you decide not to incorporate would be formed by drafting a constitution or bylaws--that would be an internal decision to form. Once [an] entity is formed, you would obtain a tax ID number or otherwise known as an EIN. That's the identification number assigned by IRS and that's the number that donors will look for when they want to confirm the organization’s 501(c)3 status. You get it at this point, even though the 501(c)3 actually happens at a later date. That tax ID number will stay the organization’s ID number. The next step is applying for the 501(c)3 status. That application is a 28 page application including several schedules that will apply to different types of organizations. The application includes questions relating to the organization's basic information, like its name and address, date of formation, its directors and officers, and of course, it's purposes and activities. The application also asks for projected budget that sets out the financial plans for the organization over the first few years. In 2014, the IRS released the short form, it’s called the Form 1023 for smaller organizations. In general organizations that project gross receipts of $50,000 per year or less--and are not operating certain activities, like a church or school--will qualify to file this form. This form is less detailed than the full 1023. It doesn't require projected budget or some of the other details, and it is generally processed faster than the full 1023 which can take about six months to process. The 1023 EZ is usually processed within about two months.

Greg Corombos: Well, that's nice. So once the status has been approved by the IRS, what happens?

Beena Soiefer: Then the organization can go ahead and apply for its state and local level exemptions and any of the other benefits that we mentioned. Some jurisdictions will allow the organization to apply for these beforehand. They're typically done after the 501(c)3 has been approved. It's a much more straightforward and simplified process at that point.

Greg Corombos: All right, we're talking with Beena Soiefer, nonprofit services and finance manager at V Corp Services. And Beena once you're officially a 501(c)3 nonprofit entity, what are the requirements then specifically when it comes to tax filing.

Beena Soiefer: The most organizations, with the exception of churches and some other church-related organizations, are required to file...it's known as a 990 series return. There's different parts of that, different 990s that could be required based on the organization specific. The return is due four-and-a-half months after the organization’s year end, which comes to May 15th for those on a calendar year. The return is an informational return, which means there’s typically no tax due with it. It provides information on the organization's activity to the IRS. It includes a report of the financial activity, its revenue and expenses, which is similar to a corporate tax return, as well as details of its program activities, and any substantial donors who made substantial donations during the year. Smaller organizations who have gross receipts under that $50,000 threshold can usually file what's called a 990 N. That doesn't ask for any kind of detailed financial information. It just reports that $50,000 threshold and keeps the IRS records current.

Greg Corombos: In addition to taxes, what other filing requirements are necessary.

Beena Soiefer: Most states have a registration requirement if the organization will be soliciting within the state. Most states have a state charities bureau that has an annual filing requirement. So if an organization is looking to solicit funds in a certain state, they would register with the charities bureau there and file a report usually on an annual basis. Some states it's a biennial, where they provide the details of their fundraising activities during the year.

Greg Corombos: Beena, terrific information. A lot of helpful tips there for folks considering this option which could be very beneficial to their business. Thanks very much for your time today.